Consumer discretionary businesses are levered to the highs and lows of economic cycles. Unfortunately, the industry’s recent performance suggests demand may be fading as discretionary stocks have pulled back by 8.5% over the past six months. This drop was worse than the S&P 500’s 1.9% decline.
A cautious approach is imperative when dabbling in these companies as many also lack recurring revenue characteristics and ride short-term fads. With that said, here are three consumer stocks that may face trouble.
Caesars Entertainment (CZR)
Market Cap: $5.38 billion
Formerly Eldorado Resorts, Caesars Entertainment (NASDAQ: CZR) is a global gaming and hospitality company operating numerous casinos, hotels, and resort properties.
Why Are We Out on CZR?
- Sales stagnated over the last two years and signal the need for new growth strategies
- Returns on capital are growing as management invests in more worthwhile ventures
- High net-debt-to-EBITDA ratio of 7× could force the company to raise capital at unfavorable terms if market conditions deteriorate
Caesars Entertainment is trading at $26.61 per share, or 121.6x forward P/E. Dive into our free research report to see why there are better opportunities than CZR.
CBRE (CBRE)
Market Cap: $39.44 billion
Established in 1906, CBRE (NYSE: CBRE) is one of the largest commercial real estate services firms in the world.
Why Is CBRE Risky?
- Annual sales growth of 11.2% over the last five years lagged behind its consumer discretionary peers as its large revenue base made it difficult to generate incremental demand
- Free cash flow margin is anticipated to expand by 1 percentage points over the next year, providing additional flexibility for investments and share buybacks/dividends
- Diminishing returns on capital from an already low starting point show that neither management’s prior nor current bets are going as planned
At $136.80 per share, CBRE trades at 17.5x forward P/E. To fully understand why you should be careful with CBRE, check out our full research report (it’s free).
European Wax Center (EWCZ)
Market Cap: $254 million
Founded by two siblings, European Wax Center (NASDAQ: EWCZ) is a beauty and waxing salon chain specializing in professional wax services and skincare products.
Why Do We Steer Clear of EWCZ?
- Disappointing same-store sales over the past two years show customers aren’t responding well to its product selection and in-store experience
- Capital intensity will likely increase as its free cash flow margin is anticipated to drop by 5.1 percentage points over the next year
- Waning returns on capital from an already weak starting point displays the inefficacy of management’s past and current investment decisions
European Wax Center’s stock price of $5.77 implies a valuation ratio of 10.1x forward P/E. If you’re considering EWCZ for your portfolio, see our FREE research report to learn more.
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